Gränges AB (publ)

Good morning, ladies and gentlemen, and welcome to this presentation of the first quarter result for Grengis. My name is Jørgen Rosengren, I'm Grengis' CEO, and I'm here with Oskar Hellström, our CFO, and we will be taking you through this presentation today. The first quarter of 2023 is one we're very happy with, very proud of, and we achieved in this quarter an operating profit on a record level and also quite a strong cash flow. Speaking first about demand, we saw lower demand in the first quarter of this year than we did in the very strong first quarter of last year. But we compensated for that slightly lower demand then by high sales activity and reached therefore marked recovery actually of about 10% relative to the last quarter of last year to 120,000 tons, which is then about 5% down from the same quarter last year.

We also made good progress on our strategic plan for sustainable growth, which we call Navigate, both on the commercial part of it, but also on the sustainability part of it. which I'll also talk a little bit more about in a minute. And to make investments in that plan, we also have, of course, to be capital efficient where we can. And therefore, it's good to see that in the quarter, we had a good reduction of capital intensity, which drove a strong cash flow and also improved leverage. Then, of course, we're in inflation times, so we did see quite large cost increases in the quarter, but managed to offset those with price and with productivity efforts. And the result of all of this, of course, is that we were able then to produce our best ever adjusted operating profit of 401 million SEC as compared to 331 last year.

Looking then a little bit further into the market, we had sequential volume recovery, like I said before, but a year-over-year decline. And the demand was different in our different segments and also in our different reporting areas. Firstly, in Americas, then, we had a rather strong decline in HVAC, where our customers are shifting foot, you could say, from growth and trying to get all the material that they possibly can to destocking and a more conservative approach to the market. which we were able to park our set with sales effort. In packaging, the story is a little bit different. Our customers saw a large influx of very low-priced materials from Asia, competing with them, and that led them to reduce their price.

orders to us, of course. But there also we were able to buy sales to effort almost fully. And had flat sales, more or less. was strongly and the automotive app is a theme that goes across our segments. I can say that the last year's difficulty in the semiconductor supply and other supply chain issues now seem to be fully resolved and automotive production is running at a good clip, which then... makes us be able to sell well into that segment also. In total in the US and Mexico, North America, we had about 6% volume decline. Whereas in Eurasia, the volume decline was 4%. And there, the story is the same in automotive, strong growth, both actually in Europe and in China. But we continue to see a weakness in the other segments, mainly in Europe then, where there is a large market inventory that we're still working down from last year. And in total for Grangistan, strong growth in autumn, 40% as the segment is down very slim and a net reduction in sales volume by about 5% relative to 2022 Turning then to the Navigate plan, we made several important advances in the quarter. One of the most exciting ones is that we entered into an agreement to create together with the Shandong Innovation Group. And this

Venture enables us to secure access to low-carbon primary aluminum and renewable energy. In fact, over time, we intend to entirely phase out usage of coal-based aluminum in China, in our operations there, in favor of solar power and hydropower-based aluminum, which will then drive a dramatic reduction of carbon footprint by 2025. but also enable us to commercially meet the very strong demand that there is now for green aluminum solutions in the Asian market. Not the least driven, of course, by the strong, strong growth of the electric and battery-driven car industry in Asia in general and in China in particular.

And we're working on that as well, Because part of the long-term growth hopes to bring a center on electrification of the automotive, of the transportation industry. And there we are. making investments to meet growing demand for battery components and also for electric vehicle components worldwide. We started the sales of such components in the last year in Asia. And we're seeing a very strong interest from battery makers, from car makers, and also from tier one suppliers for a number of product categories. I could speak for hours about this, but one of those product categories is a very exciting one. is what we call battery cathode foil and there we are progressing as planned we will launch this product in Asia in 2022 we're launching it in Europe this year and we will launch it next year in Americas We also inaugurated a new production facility in the quarter in Europe, and also announced an investment, a further investment in Europe, which will double our capacity in this particular product category in Europe from 2020. 25 and out and you can see here on the picture some of the new equipment glistening in there and getting ready for customers another important step is that in the quarter we completed on time the very important investment in the casting capacity and recycling capacity in Huntington, Tennessee in the U.S. It was inaugurated in February as you can see in the picture with the ceremony but more important maybe is that we had a very successful ramp up during the first quarter and it is now operating at a good capacity level and we had an impact on earnings in the first quarter, which will have a very positive impact on earnings, on cash flow, and also on our resources. recycling and carbon footprint from the second quarter and out.

This is a very important strategic investment for us into recycling and also a very strong contributor to our strong sustainability performance in the quarter and also we hope for the future. And therefore, we're also planning a second investment into a second recycling and casting center, which will be completed, we hope, in 2024 at the end of that year. And it will be fully powered by renewable energy and represent a good step forward for us when it comes to supplying green aluminum solutions also to our customers in the Americas. Speaking of sustainability, then, we had a good performance in the quarter, as we've had now for several years. The thing that stands out the most, perhaps, is that we had all-time high recycling volume and a share of recycled aluminum in the quarter through various successful circular charity initiatives.

and not the least, the casting and recycling center I just spoke about, but also many other things, and reached actually a recycled share of source recycled aluminum of 38% relative to 31% last year, and relative to 11% and when we started measuring this thing in 2017 so that's a very very good development we also have a record low scope one and two emissions the one and two emissions scope one and two emissions are emissions that are related to our own operations and our own energy usage and there we shifted over actually to renewable energy in asia from coal-based electricity and thereby were able to reach a record low Scope 1 and 2 emissions level as it says here on this page. In Scope 3 emissions also improved in many areas but were flat overall and that is mainly due to the phase out of low carbon Russian material which for ethical and other reasons we don't feel we can continue to use but despite that negative effect and we had a flat carbon emissions intensity year on year And it is down about 20% from the level we were at in 2017. And of course, we intend to continue to reduce it also going forward because we have set the target to be carbon neutral by 2014. And then the two things I've just spoken about, the strategic partnership in Asia and the new recycling center in America, are quite important steps towards that carbon neutrality. Going back to financials for a moment then, we feel that we were able to offset with flexibility the various challenges we were faced with during the quarter. And that's actually part also of our navigate plan for sustainability. To be able to reduce earnings volatility with increased flexibility, so to speak, no matter what the market does.

Now, in the first quarter, we were able to offset demand, which was weak relative to the very strong quarter in the first quarter of 2022. We were able to offset that weakness by mainly new business, but also by reducing the backlog that we built up during 2022. But we were also able to offset the inflation-driven cost increases, which were quite large, and in fact to more than offset them by productivity efforts and by price increases. And then we also had some other tailwinds. And as a result of all that, we reached our best ever adjusted operating profit in a climate of significantly weaker demand, which we think is actually quite well done.

And to go a little bit more into the details of this financial performance, I'm going to ask Oscar to take us through that. Go ahead, Oscar. Thank you, Julian. As we heard earlier, we made our So higher earnings generated on a lower volume. is of course also showing up as improved margins. And as you can see on this slide, the EBITDA ton improved by 700 SEC from 2.6,000 SEC in Q1 2022. to 3.3 thousand stake this year. This also means that we continue to gradually move back to historical margin levels. In fact, we must go back to Q2 2016 for an individual quarter with a higher EBIT per ton than what we recorded in the first quarter this year. Looking at the individual business areas, we can see that we are improving margins in both Americas and Eurasia, both year-on-year and quarter-over-quarter. And the key drivers of improved profitability are the price increases for several contracts that came into effect in January and the improved productivity. And we also had some positive tailwind from currency and energy cost compensation. In terms of capacity utilization, which, as you know, is an important driver of profitability for Grengis, and we continue to operate below the optimal level for the group capacity utilization was about 80% in Q1 and the flip side of this is that there is room for further margin increase from improved utilization more on the individual business areas shortly. Let's first look at group financials for the first quarter in a bit more detail.

Starting with the sales volume, this decreased with about 5% to 120.2 thousand tons, while the net sales decreased by only 2% to 6 billion SEK. The development of the net sales in Q1 is the net effect of the lower sales volume, increased fabrication price, the decreased aluminium price and positive changes in foreign exchange rates compared with the first quarter last year. Looking at the earnings, the adjusted operating profit increased by 21% to 401 million SEK, which is a new record for Grenges. A key driver behind the year-on-year improvement is that the price adjustment and productivity continue to compensate for the significant external cost increases. In addition to that, net changes in foreign exchange rates had a positive impact of 63 million SEC in the quarter.

And this is primarily the effect of the strengthening of the US dollar against the SEC over the last year. The Q1 profit also increased includes government support of 32 million SEK related to compensation for the high energy prices in Poland in 2022 and this will not be a recurring item for the remaining quarters of the year increased within total 22 million sec and this is primarily related to that we have completed the logistics improvement project in Sinsbong and the recycling center in in Huntington as you heard from Jörgen and we started to depreciate these in this year there are no items affecting comparability in the quarter as a report to the operating profit but is therefore the same as the adjusted operating profit in Q1. The profit for the period increased to 254 million SEC, and earnings per share increased to 2.38 SEC in the first quarter. Another very positive thing in Q1 is the significantly improved operating cash flow As you might remember, we typically build working capital in the first quarter due to the seasonal increase in business activity from Q4 to Q1 Now, last year, this build-up was further amplified by the dramatic, to say the least, increase in the aluminium price on the back of the start of the war in Ukraine, and this led to a 1.2 billion SEG negative cash flow for grayness in Q1 2022. This year, the large focus on reducing working capital mitigated the seasonal Therefore, we ended the quarter with a positive cash flow before the financing activities of 287 million SEK. I think that's a great achievement by the greatest team.

um as we can see on the next slide the strong cash flow contributed to keeping the financial net debt stable at 3.9 billion sec during the first quarter and driven by the improved earnings the net debt to ebta ratio improved to 1.8 and this means that we continued to improve within our target range of one to two times ebta In the quarter, we also continued to invest in total 203 million SEC in the expansion of the Grenges Group and in key areas such as more sustainable and circular products. The majority of the spend in the quarter relates to the expansion of capacity and capabilities for battery cattle foil in Americas and in Europe, and also to the second of the two recycling centers and casting centers that we are building in Americas.

Let's now take a closer look at our business areas, and we start with Greggs Americas. As you heard from Jörgen earlier, the market demand in Americas was significantly lower than last year. despite we successfully compensated for some of this the sales volume was down about 6% year on year On the positive side, productivity improved significantly in Q1, and we continue to improve the operational performance in the Salesforce facility. Now, due to the lower market demand, the sole spray output was not a limiting factor for sales in this quarter, as it was for the second half of 2022. Now, despite these changes, challenges, the adjusted operating profit increased to 269 million SEK, which corresponds to an adjusted operating profit per ton of 4.5 thousand SEK. Now this is a very good market level given the fact that we were only operating at slightly above 80% capacity utilization in America in the quarter. We had some help from favorable currency that contributed about 25 million SEK to the earnings compared with last year but the majority of the year over year improvement is related to improved pricing and productivity that managed to fully offset the cost that we continue to experience in Q1 going forward we expect to get further positive impact on the cost side from the new recycling and costing center and during the first quarter as we heard from Jörgen this has been successful and that means that we expect it to contribute increasingly positively to the earnings in the second quarter with the

Grengis Eurasia, there we also continued to experience a mixed market development in the first quarter and that resulted in a 3% year-on-year sales volume decline. Demand from automotive customers in Asia primarily was strong then fueled by the backlog and in total sales in Asia increased by 15% in the first quarter. This was however then offset by an 11% lower sales volume in Europe. Similar to the fourth quarter last year, the development in Europe is driven by two key things. First, the general negative market sentiment outside of automotive. And second, that inventory levels at downstream distributors remain on a high level for, for instance, general engineering and building and construction products.

The tight engineering and BNC market also reduces the possibilities for optimizing metal management, which had a negative impact on the earnings in the quarter. that the adjusted operating profit for the quarter increased to 171 million SEC corresponding to an adjusted operating profit put on of 2.6 thousand SEC I think this is driven by hard work with price and productivity improvement. We also get some help from external factors in the quarter. First, we started to get some positive effects from the release from the European natural gas market as we gradually worked our way through the inventory in the Koning plant. Second, and also connected to the energy situation in Poland, we received energy cost compensation as I mentioned earlier and finally net changes in foreign exchange rates had a positive impact on 39 million SEC in the first quarter With that, I hand over back to Jörgen, who will give you an outlook for the second quarter and the summary of the first quarter. Jörgen. Thanks, Oskar. Yeah, so it's not the easiest thing to make. an outlook in this quite turbulent environment, but there is, of course, high uncertainty in the market in all of our regions. We expect, however, a continuous good momentum in automotive year to year because of the easing up of the supply chains globally at least during the second quarter and we expect soft demand in all other markets which will then partly offset that however we will continue to work on sales efforts to mitigate any shortfall of volume from these things

And therefore, we're projecting a second quarter volume, which we believe will be in line with roughly or maybe slightly below last year's volume in the second quarter, which means also about the same level as we had in the first quarter of this year. We retain the ambition to continue offsetting any cost increases driven by inflation with productivity improvements and with price increases. And we expect a further positive effect of the recently inaugurated recycling and casting center in Huntingdon, all forecasts that apply to the second quarter of 2023. So we're soon going to open up for Q&A here, but to summarize the quarter, I guess we can say that we had a strong volume recovery in the quarter of about 10% sequentially.

And this was despite the significantly lower demand year-on-year than in the very strong first quarter. quarter of 2022, which we then were able to partly compensate for by a very active and flexible sales performance. We had good cash flow in the quarter, which was primarily driven by the a strong and high level of control of our network and capital. And that led to an improvement of our leverage year-on-year and also sequentially, which is quite good. And we made good progress on the Navigate plan for sustainable growth with a good reduction of our carbon footprint. We entered into partnerships. for green aluminum in china we continued working on the electrification from the investment side and on the commercial side and we made an investment and started it and the new recycling and casting center in Huntington, Tennessee in the U.S. All of these things are important for long-term sustainable growth, which is the objective of the Navigate plan. All of this led to a very strong profit development in actually both our segments and in total our best ever quarter profit-wise in what we regard part is a very tough environment and we forecast flat volumes for the second quarter of this year and continued offsetting of inflation driven costs and that summarizes our our prepared remarks for today's conference call. And we would like now then to open up for any questions or comments that you may have. So please go ahead. If you wish to ask a question, please dial star five on your telephone keypad.

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The next question comes from Gustav Schwen from Handelsbanken. Please go ahead.

Yes, hello. Can we start by the earnings in America, which are quite impressive? I mean, if we look at the volumes quarter on quarter, they are relatively stable. You have an extreme step up in earnings per tonne. I understand the components, the effects we of course have, but can you give us some more color on the constriction, how much mix improved earnings, price, the operational efficiency part, and also the casting center saving of the first one?

Yeah, I can start a little bit and comment on the more technical aspects of this, and then maybe Jörgen

can add if I forget something but I mean we see sequentially a very favorable margin development in Americas and We should also note first that, of course, Q4 is the seasonally weakest quarter for Grengest. That is true for America, that is true for Eurasia as well, and that goes for both sales volumes. typically, and sort of mix and margins. If we compare Q1 to Q4, we have a little bit of volume growth, a little bit of mix improvements, biggest drivers of the improved earnings are really the price increases because as you know we have short term contracts we have long term contracts and many of the long term contract there you adjust prices starting 1st of January so of course we passed 1st of January we have new pricing for many contracts that's a big driver In addition, as you may remember, we did not have the best quarter in Q4 from a productivity perspective in Americas. This quarter is much better. And that's much better in... Our Salisbury facility, where we've struggled a little bit more maybe in the past, but it's also better in the other locations. And in addition to that, of course, we have a tailwind front. from currency and we start to get some positive impact from the new recycling and costing center they're reducing our cost of materials. So that's the drivers. But I would say in order of magnitude, price is the largest one followed by productivity improvements. Perfect.

And I mean, when we think about the delta in savings, Q2 versus Q1, I mean, is it two, three times higher? I mean, we know the capex and we know, or we can make an assumption on the return on capital employed, but just to get a feeling for how much bigger the savings would be already in the second quarter.

Are you referring to the savings coming from the recycling and costing center then?

Yeah. Yeah.

I think we have previously said that, okay, first we need to keep in mind then that the size of the savings are always relative, of course, to the market price if you outsource this production step. And based on the current market price...

We believe that at run rate, the annual savings of running this recycling and casting center is about 20 million US dollars, about 200. million SEC on full year that would be then 50 million SEC or so quarter now we don't expect to get that full back benefit necessarily in Q2 but a large part of it and then we got some benefits already in Q1 so maybe some some 20, 30 million sequential improvement from this is what we can expect. Perfect. Thank you. I have a question on the demand situation outside automotive for Eurasia. I mean, we can see the volumes, of course, but we should have made the changes to... On the line, the man versus the fourth quarter. Or is that hard to call now, given the inventory situation?